The first time I sat down to sign up for my benefits most of it might as well have been in a different language. There was a lot of clicking back and forth between the application and looking up terms in Google. Eventually, I gave up. I needed to talk to some of my new coworkers about what certain things meant and what they signed up for this year, especially when it came to health insurance.
What I found was most people I worked with weren’t 100% sure about the definitions of certain terms or how they all fit together to provide health coverage. The most common answer I received was, “Well, I always sign up for this plan and it seems to do a good job.”
When it comes to your money, you need to know what you are signing up for when picking a healthcare plan. Don’t be caught off guard by medical bills because you didn’t know what you were buying. Understanding your health insurance can be a little confusing, but once you break down these four terms it helps make sense of when you pay out of pocket and the cost when you need healthcare.
Deductible: The amount you pay each year for healthcare before your insurance plan starts paying. For example, a $1000 deductible means you pay the first $1000 for covered services before your plan starts covering some of the cost. Co-pays generally do not go towards your deductible.
Co-pays: The fixed amount you pay each time for a covered service. If your co-pay is $20, then you will pay $20 at the time of service. Not all plans have a co-pay.
Co-insurance: The percentage of cost you pay for services after your deductible has been met. Let’s say you have an 80/20 plan. That means you are responsible to cover 20% of the cost of the bill. For example, if you have a $100 bill you would pay $20 and your insurance plan would pay $80. Remember, this only applies once you’ve reached your deductible.
Out-of-pocket maximum: The most you have to pay for covered services in a plan year. Once you have spent this amount on deductibles, co-pays, and co-insurance, your health plan pays 100% of all covered expenses for the rest of the plan year. So if your max out-of-pocket is $5000, once you spend that amount on deductibles, co-payments and co-insurance, the plan will pay 100% of covered costs for the remainder of the year.
Making sense of it all
Taking the numbers above we will use them for our healthcare plan example:
Deductible = $1,000, Co-pay = $20, Co-insurance = 20% and Out-of-pocket max = $5,000.
You just started your new anesthesia job on January 1. Your healthcare plan is active and you are ready to work, but then there is a series of unfortunate events.
January 15 – It’s flu season and the flu shot didn’t work. Now you are at the doctor’s office. Your co-pay is $20 and is paid as soon as you walk through the door. The doctor checks you out, makes their recommendation and sends you on your way. A week later you receive a bill for $150 and you pay it in full. That $150 goes towards your deductible and reduces it from $1,000 to $850.
February 15 – You step off a curb the wrong way and twist your ankle. You visit your orthopod and pay the $20 co-pay at registration. You are diagnosed with a sprained ankle and receive a bill in the mail for $850. You pay it in full and now you have met your deductible. Your deductible was $1,000 and between the two bills, $150 and $850, you have now paid the full amount towards it. Finally, your plan will start kicking in some money.
March 15 -Since you were recovering from a sprained ankle, you starting favoring your right leg more and wake up one morning with a swollen knee. Back to the orthopod, another $20 co-pay, and this time a hefty $2,000 bill. You have already met your deductible so now your co-insurance kicks in and you are responsible for 20%. You write a check for $400 and the health plan pays $1,600.
April 15 – If you thought March’s bill was bad, it’s Tax Day and things just got worse. You hit your head hard after a bad fall and spend 48 hours in the hospital for diagnostic tests and observation. You paid $20 for your co-pay and receive a final bill of $30,000. Your coinsurance is 20%, so you would owe $6,000. This is where things get really interesting.
Remember your out of pocket maximum is $5000. This year you have already paid $1480 out pocket ($20+$150+$20+$850+$20+$400+$20=$1480).
So, $5000-$1480= $3520 is all you would pay of the new bill because you will have reached your maximum out-of-pocket expenses. That means the plan will pay the remaining $26,480.
Hopefully, moving forward there will be no more doctor visits. However if there are, your healthcare plan will now cover 100% of expenses. So get out there and go crazy. At least now you understand what your health insurance will cover and what you are financially responsible for when a bill shows up.